What to know
Under the Biden Harris Administration, it's highly likely taxes will be going up to help pay for the historic level of government spending. And one of the areas in which they plan to impose higher taxes - impacting many of our clients - will be gift and estate taxes.
Where estate taxes are today (and where they could be going)
Thanks to the 2017 Tax Cuts and Jobs Act, estates and lifetime gifts that are LESS THAN $11.7 million avoid estate taxes. For married couples, your unified gift and estate tax exemption is actually double that at $23.4 million). The 2017 Tax Cuts and Jobs Act is set to sunset on December 31st, 2025. So the expectation is that these higher exemption amounts will remain in place for at least the next few years.
However, the Biden Harris Administration has a clear desire to dismantle the 2017 tax cuts sooner than the end of 2025. Should things go as planned for our president, the new estate tax thresholds will become effective January 1st, 2022. At which point the number of estates exposed to gift and estate tax will increase exponentially. Because on day one of 2022 the estate tax exemption would drop to $3.5 million if you're single, and $7 million for married couples. Then the lifetime gift exemption (which is currently the same as the estate exemption) would tumble all the way down to $1 million if you're single, and $2 million if you're married.
To help manage this risk of increased estate taxes, here are three prudent strategies that will potentially mitigate higher wealth transfer taxes:
How to navigate higher estate taxes
Gifting is smart option if you have a desire to provide financial gifts to family and friends now. You can give up to $15,000 per donee without having to pay any gift taxes ($30,000 per donee if the source of gift is from a married couple). For example, if you are married and have four children and eight grandchildren, you and your spouse can give $360,000 annually ($30,000 to each child and grandchild), avoid the gift tax, and reduce your taxable estate by $360,000 each year.
Life insurance is another technique that can help minimize the burden of estate taxes on your heirs. Benefits from a life insurance policy typically pay out tax-free. That extra tax-free life insurance money can help offset the cost of estate taxes your beneficiaries could eventually face. The proceeds from the life insurance can also help by supplying your estate with liquid cash. And having liquidity is important. as federal estate taxes and state (CA) estate taxes are due in cash after just nine months of death. Oftentimes, estates WITHOUT life insurance are forced to fire sale assets like real estate or stocks to cover taxes. By utilizing life insurance, assets can pass intact to your heirs.
Charitable donations can make sense if you're charitably inclined and you're sensing the proposed estate tax thresholds will derail your legacy plans. There are a handful of prudent ways to gift your wealth to the charities and causes you feel strongest about. Gifting the annual limit of $15,000 is one approach, and probably the simplest and most straightforward. But other ways of giving might deserve consideration if you really want to aggressively pursue lower estate taxes. Gifting methods like Donor Advised Funds, a Charitable Lead Trust, and Qualified Charitable Distributions from your IRA are all strategies that can help you reduce your taxable estate, while at the same time fulfilling your philanthropic goals and desires.
Quickly summarizing all the above
Our current estate tax rates are on shaky ground. Moving forward it will be prudent to prepare with the appropriate solutions so you can increase the likelihood you preserve more of your wealth for the next generation.